So you've been in a car accident and we have negotiated an ENORMOUS settlement for you.
How much is the IRS going to take? After all, they weren't the ones in the hospital. They didn't get whip-lash. They didn't go through months of therapy. They didn't have to replace their car, or deal with insurance companies and lawyers.
So how much do they get?
Any type of monetary awards for personal injury damages, that are the result of physical injury, are generally NOT taxable by the IRS. Whether you receive those awards as a part of a pre-trial settlement, or whether you proceed through a trial and receive those awards as part of a judgment, is irrelevant. The federal government cannot tax the proceeds from those amount awarded as a result of a personal physical injury claim. State governments are the same, and also cannot tax you on those amounts.
Federal tax law makes allowances for amounts received as a result of personal physical injury (or physical sickness) and allows them to be excluded from a taxpayer's gross income.
In other words, the amounts received in order to make you whole (i.e. lost wages, medical bills, pain and suffering, loss of consortium, and attorney's fees, also known as COMPENSATORY damages) are not taxable, as long as they are awarded as a result from a personal physical injury or sickness. (An example of a sickness claim would be if a person acquires cancer as a result of being exposed to asbestos). That's the good news…
BREACH OF CONTRACT
If your injury resulted from the breach of a contract, or if you filed a breach of contract claim along with your personal injury claim, those amounts awarded pursuant to the breach of contract ARE taxable. For instance, if you entered into a contract for a whale watching tour and were injured on the tour, your attorney could conceivably file the personal injury (negligence) claim, and a breach of contract claim where the injury resulted from some term of your agreement being breached. Any amounts awarded due to the breach would be taxable on your year-end tax return.
In addition, punitive damages (punishment) are taxable. If you receive an award after trial and you have requested punitive damages, we would request that the verdict be divided out to show which amounts are for punitive damages and which are for compensatory damages.
Interest on awards is also taxable. Filing the lawsuit is only the beginning of a sometimes very long process. If you filed your complaint today, and went to trial in a year, the judgment would probably include an amount for interest from the time you filed your complaint to the time it was awarded. If the defendant appeals and doesn't end up paying for you another year or two, that could be three years of interest, all of which would be taxable.
EMOTIONAL DISTRESS OR EMOTIONAL INJURY
Claims that are strictly for emotional distress or emotional injury ARE taxable, unless you can prove some element of physical injury, as well. For example, if you file a claim for sexual harassment at work and your damages are strictly emotional in nature, all of your award will be taxable.
It pays to have an experienced personal injury attorney representing you in these types of cases, as we are skilled at negotiating settlements and documenting agreements in order to insure that our clients are taxed on the lowest amount possible. Settlement agreements should specifically state what part of the award is for the physical personal injury claim, and which amounts are for other claims. The same is true for jury or court verdicts and awards. The final awards should be parceled out to indicate exactly what each dollar is going towards.
If you have a potential personal injury claim in New Hampshire, make sure that you are represented by the most skilled trial lawyers available. Contact Ryan Russman at Russman Law today to schedule a free case review. He will go over the facts of your case with you and outline any possible claims you may have. He will also outline the process your case will go through so that you know what to expect.